7 Reasons Why Netflix's Price Hike Is a Bonehead Move

Reason #5: If 50% of by-mail subscribers stop streaming, Netflix's profit could drop 95%

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If you're a Netflix disc-by-mail subscriber, then you got a very irritating e-mail yesterday. The company announced new pricing plans, through which it intends to break out the costs of streaming and by-mail services. Currently, anyone who subscribes by mail can stream at no additional cost. While the concept of a la carte pricing for these services might be well-intentioned, the company's execution was not. This move is misguided for at least seven reasons.

It Amounts to a Giant Price Hike

This new strategy by Netflix will not be perceived by consumers as a way to empower them to decide whether they need streaming or not. To accomplish that result, Netflix should have left the total price for by-mail plus streaming unchanged, but broke the two out and allowed customers to stop paying for one or the other. Instead, it will slightly decrease the cost of its by-mail service and will require customers who want to keep streaming as well to pay a significant premium. As a result, the move will be interpreted by customers as a rate hike, not a move meant to provide them more flexibility.

No Value Added

If you're on the one DVD-by-mail plan, then you currently pay $9.99 per month and enjoy streaming as part of the deal. To continue to stream, you'll now have to pay $15.98. That's a 60% increase! Now if Netflix was suddenly offering its entire library via stream or providing some other additional service, then customers might be able to stomach this rate hike. It isn't. They're getting the same services they got before, but now Netflix is charging much more money for them.

Streaming Isn't There Yet

A time might come when it would make sense for Netflix to charge a significant premium for its streaming, but the service has not yet reached that point. Although its streaming library has grown significantly over the past few years, a huge portion of desirable movie and television titles remain unavailable by stream. Using my own Netflix queue as an example, just 3% of my selections are available by stream -- and less than one-third of my queue's titles were released in 2010 or later. If Netflix wants customers to pay a lot more for streaming, then it needs the quality of its service to better reflect its cost.

Netflix Doesn't Need the Money

The oddest part about this rate hike is that Netflix doesn't really need the money. It recently increased its fees (announced last November) by between 7% and 17%. Moreover, its profits have been strong over the past couple of years. And in the first quarter its profit soared 28%. It may want additional revenue to acquire more licensing to stream more titles, but a big rate hike like this may do more harm than good.

Netflix May Lose Money

In fact, this pricing change could easily cause a decline in Netflix's revenue. Last night, when I got home from work I told my wife about the rate hike. She was coincidentally watching an old Diane Lane movie she found scouring the Netflix streaming library. But without taking a beat, she said, "Oh, we can cancel streaming. It isn't that good." If you don't think a service is worth its price at the moment you're using it, that's a pretty bad sign. Many subscribers will agree that streaming isn't worth the extra money at this time. 

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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